September 2020 was a difficult month for the Global Alternative Smart Alpha Strategy, with most underlying managers being in negative territory.
September Performance: -2.21% (net)
YTD Performance: +9.05% (net)
Winning Months (%): 72.7%
Annualized Standard Deviation: 4.34%
Sharpe Ratio: 2.27
Maximum Drawdown: -2.21% (September, 2020)
Correlation vs. S&P 500 TR: -0.08
Correlation vs SMI: -0.26
Global Fixed Income & FX: the strategy suffered from the story in the US fixed income market where uncertainly was high but little changed throughout the month of September. This low volatility setting with false breakouts and intraday reversal was a difficult trading environment for the manager’s models. In the early part of the month, machine learning and contrarian models went short the fixed income market looking for another leg down. However, the rally back up in the subsequent days resulted in losses to begin the month. On the long side, the manager’s breakout and hybrid models took a long position near the middle of the month in European fixed income but the market posted an intraday reversal. The foreign exchange sector was difficult as well with intraday reversals and generally listless trading.
Systematic Trading: September witnessed unusual options activity in the Tech sector during the U.S stock market’s rally creating a short squeeze on the upside that spread to the entire market. Since April, a big institution (most likely SoftBank) bought billions worth of calls – in turn, stressing market participants upside risk slides and pushing them to seek protection by buying the underlying asset (Tech companies, S&P 500, Nasdaq). This led to a reduction in their short-implied volatility by buying options and VIX futures. The direct consequence: a decorrelation between the VIX index and the S&P 500 index. The uncertainty over the U.S elections and a looming second wave of COVID-19 infections combined with this unusual options activity lead to one of the longest episodes of high risk-premia for the VIX leaving very few trading opportunities. In particular, decorrelation effects between the S&P 500 and VIX Index contributed to the negative performance.
Long/Short Equity & Arbitrage: September was a less active month within some of the arbitrage strategies, and with opportunities in this space in short supply, suffered a negative return due to some seasonal unwinding costs. The long/short intraday trading strategy still recorded a positive return for the month. The manager continues to apply a strong focus on risk management within all strategies given the heightened equity volatility during the past 6 months.
Global Macro Value: The strategy suffered from the uncertainties with the US stock market bubbly. This added an extra layer of risk. The manager’s central case is the hopeful one: that the vaccine news will be good; that that plus very stimulative monetary and fiscal policy presages a strong 2021 of growth globally, led by DM; and that therefore there is upside in much cyclical equity and other risk assets. The core of the manger’s book is positioned for this. But at the same time there is an obvious risk to this view: that vaccine news is not good, meaning a long grim winter awaits, and that, at worst, an acrid, contested US election presages a body-politic unable to compromise on anything, including the needed further fiscal stimulus. Moreover, given the recent run-up and the proximity of the elections, the manager suspect the markets are more likely to chop around in October, with ensuing downside risk also from the accumulated recent momentum-buying.
Multi-Assets: Our Multi-Assets managers provided mixed results. One of our mangers achieved its annual targeted return within the first 8 months. The strategy has continued this consistent pattern in September and contributed positively to the Global Alternative Smart Alpha strategy. The layering approach that the committee have taken for the fund mixes investment in cyclical, defensive and efficiency-based assets. This multiple approach continues to serve the strategy well during the first part of 2020 where many others are faltering.
Our second Multi-Asset Manager is continuing to focus on creating real resilience. This goes beyond using financial resilience to build a better blend of returns - it's about ensuring the portfolio is well positioned at a more granular level to underlying themes, including sustainability. The most important action is to align strategic asset allocation to ensure the portfolio remains resilient to what the manager has identified as three supercharged trends. First, the policy revolution combined with the risk of supply shocks, raises the potential for higher inflation in the medium term and challenges the role of nominal government bonds and impending negative interest rates as ballast over a strategic horizon. Second, the pandemic has accelerated a tectonic shift toward sustainability and the manager is comfortable with the exposure here. Third, deglobalization and fragmentation call for a focus on real resilience; diversifying across companies, sectors and countries that are positioned well for these trends, again the manager emphasizes that he is well positioned here, with reference to the 3-5 year timeframe for out performance.
Despite the unprecedented global challenges to market conditions in 2020 and beyond, we believe that the Global Alternative Smart Alpha Strategy is well positioned to provide capital protection and diversified sources of returns and stability over the long term.
September 2020 Fact Sheet: https://bit.ly/2HmXWkQ